How Does Inflation Affect the Retail Industry? What Retailers Need to Know + 6 Areas to Focus on Now

Like more clarity on inflation & everything that's going on atm? We tell you in plain language, with info on the CPI, RBA & interest rates. Plus, successful retailers share tips on what to do now.
min read
Retail Express Team
July 6, 2022
Retail Express Team
July 6, 2022

Table of contents

Just when we thought it was safe to step back in the ring, retailers have been dealt another blow — inflation. After supply shortages, surging fuel prices, wage increases, a substantial CPI hike and interest rate rises, AU & NZ retailers are again feeling the heat.

But as Covid has taught us, with crisis comes innovation. It’s time (again) to take a deep breath, take stock and then take action with strategic solutions to strengthen your business. With the right approach, financial and retail experts say it's more than possible; it’s an opportunity for growth.

“Retailers can catalyze (sic) these challenges into opportunities—if they make bold, deliberate decisions. Indeed, companies that achieve breakthrough performance during economic downturns tend to outperform their peers over the decade that follows.” – McKinsey

This article will explain what inflation and similar terms mean, in simple language, and how it affects retail. Plus, we give you actionable tips from business professionals and seasoned Aussie retailers we've recently interviewed to help you stay on top of this testing phase and outshine your competitors.

Understanding inflation in economics

What is inflation?

Inflation is a general increase in the prices of goods and services and the consequent fall in the purchasing value of money. The Consumer Price Index (CPI) is the most common indicator of inflation. The CPI measures the percentage change in the price of a basket of goods and services consumed by households. 

To put inflation into context, if you bought a lampshade for $100 and the same item cost $106 precisely a year later, inflation for the year on that lampshade would be 6%.

In Australia, the Australian Bureau of Statistics (ABS) calculates the CPI each quarter. Changes in inflation rates can affect consumers and businesses, and that includes retailers.

Investopedia summarises the pros and cons of inflation as follows.

Pros of inflation:

  • Leads to the higher resale value of assets (e.g. real estate, stock commodities such as gold)
  • Optimal levels of inflation encourage spending

Cons of inflation: 

  • Consumers have to pay more for their goods and services
  • Puts higher prices on the economy
  • Drives some prices up first and others later

Retail gets better with omnichannel software. To show you how, Retail Express offers free customised demonstrations. We’ll ask questions, listen to your needs, and tailor a demo specifically for your business.

Get a free demo with an Australian-based retail expert today.

What makes our prices rise?

Our prices rise through a confluence of events. But essentially, our prices increase faster when the economy starts to strengthen. 

How so? A good economy usually means unemployment falls, forcing companies to pay higher wages. People have more money in their pockets, increasing the demand for goods and services.

Consumers also want to buy more than they did at previous prices, so prices rise. And, as businesses now have to pay more in wages, they have to factor those into their pricing, too.

Supply constraints also affect pricing. Take today’s petrol prices, for example. The prices haven’t risen because we want more petrol, but because the oil supply has drastically changed.

Other contributing factors to price rises include natural disasters, government policies, taxes and subsidies — and just because we expect them to.

But (for the love of low-interest rates) why now?!{Why is this happening now?}

Yes, it seems unfair, given the constant stream of disasters we’ve had to swim through. 

But, we have had low inflation for a good six years, partly thanks to Covid. However, underlying price pressures started to heat up midway through 2021, according to the Financial Review.

What sort of pressure? 

We’ve had a strong demand for labour, low-interest rates and massive government spending (think Covid relief and stimulus packages). All this has boosted our demand for goods and services. And as all retailers know, this demand has put loads of pressure on supply chains and shipping prices.

Then, to push things over the edge, the cost of building a new house (a huge part of the CPI basket of goods) is increasing faster than it has in 10 years due to higher wages and building-material prices.

When inflation rises, the RBA, using the CPI figure to judge economic activity, decides to increase the cash rate to slow down activity a bit. This is when institutions usually raise interest rates.

How does inflation affect the retail industry?

Inflation affects the retail industry in various ways. To keep things simple, let’s look at two strong contributors: consumer spending (and sentiment) and supply chain factors.

Consumer spending-

Consumers tighten their belts with inflation on the rise and interest rates increasing. Discretionary spending slows down, and shoppers become price-conscious, choosing cheaper products wherever possible and focusing on essentials.

Not all retail categories are affected, though. Some small luxury items do notoriously well in difficult times. ‘The lipstick effect’, a term coined by Leonard Lauder, heir to the Estee Lauder fortune, is a great example. An affordable, transformative pick-me-up, lipstick sales have often been inversely related to economic health since the Great Depression in the ’20s. 

According to Internet Retailer, clothing sales are also anticipated to forge ahead this winter, now that people are finally out and about in post-lockdown mode. And let’s not forget, many employees are finally stepping out of their Zoom-friendly tracky dacks and into brand-new work attire.

Supply chain-

While we all sat at home, outrageously bored and unable to indulge in services or usual activities, many of us reached for physical products to purchase. Sales of furniture, gym equipment, electronics and homewares skyrocketed, putting a massive strain on suppliers and port workers.

By July 21, the average price worldwide to ship a 40-foot shipping container more than quadrupled from the previous year, according to the Wall Street Journal. Meanwhile, Shipping Australia stated that ship-operating costs down under have soared by up to 773%.

To put this into (staggering) perspective, the one-day operational cost of a typical 4,250 box ship that calls in Australia increased 400% — from approximately US$30,200 a day in June 2020 to about US$151,400 a day in September 2021.

Imagine there is a 10-day delay in a local Aussie port. The cost? Approximately US$1.5 million for each delay for each ship. That hurts.

So what can retailers do to succeed now?{What retailers need to do to succeed right now (go here for tips)}

According to a June 2022 report by McKinsey, retailers must come to terms with this new reality, and “develop solutions to sustain their businesses, retain customers and ensure long-term growth”. Further, retailers must work on areas to “transform this period of stress into an opportunity for the future.”

As one long-term Retail Express client remarked, "We can only control what we can control. There’s little room to negotiate on import costs or pricing of wholesale products. But we can control our depth of analysis, buying patterns — and most importantly, customer service and our focus on brand building."

Here are six areas we consider vital for Aussie and Kiwi retailers to focus on.

1. In-store operations and efficiencies-

With wages increasing, retail store owners need to get the most out of their staff. This does not mean working them to the bone but focusing on two areas: thorough training and technology.

Regularly train your staff in the latest sales techniques, product information and ways to improve efficiencies. Also, hire knowledgeable, experienced staffwho can deliver more to customers. 

For example, if you have a cookware store, hire enthusiastic home chefs; if you sell activewear, hire staff who regularly run, play sports or frequent the gym. Hire staff that live and breathe the activity that requires your product.

Look after your team, too. Hiring and retraining is an expensive exercise, so invest in your staff, both through education and your treatment of them appropriately.

 From the blog: Cross-selling & Upselling Retail Examples + How Software Automation Takes Results Next-level

See stock visibility and fulfil orders fast with POS software

Technology is now a must. Advanced, agile point of sale software will allow you to automate many tasks, enable your staff to provide a better customer experience and sell more (through automated upselling features and recommendations). POS software also gives far better reporting, allowing staff to see stock availability, ETAs, staff performance and more.

Optimising your online store is also imperative as, among many things, it can take the strain off your staff workload. Include thorough information for every product online and offer information screens in-store the customers can access for more information.

Retail gets better with omnichannel software. To show you how, Retail Express offers free customised demonstrations. We’ll ask questions, listen to your needs, and tailor a demo specifically for your business.

Get a free demo with an Australian-based retail expert today.

Check forleaking buckets. Scrutinise your business practices by closely monitoring yourbusiness reports. According to Alex Albednour, a partner working with clients on price optimisation, growth strategies and revenue management, most companies don’t measure the costs ofinefficient operations that can eat into your much-needed profit.

Albednour quotes an example that if a customer orders threetimes a week, that means three times the freight cost, staff input andfollow-up. If they ordered only once a week, there would be far more profitsleft on the table.

TIP: To increase basket size and save on freight costs, encourage customers to think ahead. What items might they need in the coming months? Do this in-store and online.  One Aussie retailer has enjoyed substantial success cross-selling equally large-value items online, not small add-ons.

How so? Using Retail Express marketing and loyalty software, once a set order value is reached, the software can suggest additional high-value items (or items of any value) with a small discount. Problems solved. Basket size increased. Freight costs lowered.

2. Pricing-

Be strategic with pricing increases. Broad sweeping price increases can be off-putting for customers and damage your brand. Instead, think through your options and tailor your price increases. 

Think about the customer and product segment, considering both margin performance and the most realistic factor of all: what customers are prepared to pay. 

Consider the frequency of promotions, too. Regular markdowns may have been an excellent idea previously. Still, if they eat too much into your margins now, they may force you to lift prices across the board, which is not recommended. 

Also, keep your strong customer relationships intact by being transparent.  

Tell your customers that certain items must incur a slight price rise for a specific reason. For example, price rises may be due to unexpected freight prices, increased manufacturing costs or your choice to pay staff what they deserve.  

Your customers will appreciate your honest communication and be more likely to maintain affinity with your brand.

3. Focus on your customers-

Price will be a strong driver for some customers for some items during tough times. However, many will also be prepared to pay extra for goods if they develop strong brand loyalty. So deliver well on customer experience (CX). This will pay dividends on brand loyalty, word of mouth, customer growth and retention.  

If you’re not sure what your customers want, find out! Get your frontline staff asking questions and striking up conversations. And ensure they listen to what your customers say and report back to management with the news.  

Australian multi-store retailer Steve Brown (not his real name) says their operations manager has systemised this approach. Staff notate all customer feedback into an online programme. Then once a week, all store managers report back with the feedback. 

Brown also stresses that customer service is the backbone of their business. They hire staff with a strong interest in their product line who are active in their industry’s community. Plus, all staff are given a network of professional contacts for customer referral to improve their health further. More than just making sales, their brand is about offering a service.

Deploying the right CRM, marketing and loyalty software to create customer surveys is equally essential. Powerful marketing and loyalty software can take you much further when connecting with and understanding your customers.  

Retail Express POS software has built-in marketing and loyalty features that allow you to do the following:

  • Access buyer behaviour reports
  • Create customer profiles
  • Segment customer promotional groups
  • Create tiered loyalty programs
  • Create multiple purchase benefit campaigns
  • Send targeted email and SMS campaigns
Learn more about delivering exceptional customer experience:

4. Keep an eye on your competitors-

When inflation hits, competition can be steep. But this doesn’t mean it should be a race to the bottom. Instead, watch closely what your competitors do and how they promote. But remember, there is no need to follow everything they do. Scrutinise the products they have priced lower than yours and see if it’s necessary to price match. 

Don't put too much focus on competition, though. Conversely, now is also the time to strengthen your business by aligning yourself with others. According to Business Queensland, this involves strategies to broaden your customer base and market your business affordably. Align yourself with other businesses and networks to form alliances which will help minimise your exposure to risk.

TIP: Think of business owners or service providers who would appreciate a mutually beneficial arrangement. One retailer interviewee, for example, benefits  through solid referral relationships with healthcare professionals, even organising regular info nights to showcase new products that may benefit their patients.

Good inventory management software helps eliminate overstocks and understocks

5. Keep popular items in stock-

Organisation, reporting and analysis should now be your focus if you want to keep popular items in stock. Successful retailers we interviewed said they’ve never spent more time on analysis. Analyse product lines, colours, sizes, sell-through rates, store performances — everything.

The best way to achieve this is by deploying good Counter this problem is by deploying good inventory management software that will help improve your stock levels in the following ways:

  • Improved reporting – with flexible reports on all stock variables that can automate actionable solutions
  • Offer live stock levels available online
  • Offer Click & Collect – picking up from the nearest store
Omnichannel software allows for faster shipping and more sales

6. Switch to omnichannel retail-

Integrating your bricks and clicks (physical stores with your online shop) is one of the savviest retail business moves you can make. And today, it’s practically essential.

We recently asked some of our winning retail clients how omnichannel helps them the most. Here were there most common replies:

  • Visibility (knowing where stock is allocated, up to the-minute)
  • Immediacy of a cloud based system with no delays
  • Better customer experiences through a more personalised service
  • Outstanding reports that allow the retailer to take fast action

In a climate where every dollar counts, retailers must ensure they get the help they need by deploying the right software, not just any software. Here are some of the ways software can rapidly start paying for itself:

  • Displaying live stock levels online: With all stock data now centralised, customers can search online for a product. There are no more different stock levels for online and in-store. Everything is visible online. 
  • More functionality at the POS: Retail staff can search for stock at the POS, see ETAs and organise delivery or stock transfers for the customer. They can also be prompted with upselling or cross-selling items, see the customer’s order history and more.
  • Click & Collect: with live stock levels displayed online, customers can purchase the item online and then pick it up at the most convenient store.
    Omnichannel software will also pay for itself by giving you drastically improved inventory and fulfilment options. Smart algorithms in real-time reports will allow for inventory reallocation, better planning and purchasing and the ability to ship from the nearest store.

If customers are searching for a product, they can go online and order it. You can then ship it from the nearest destination to the customer. Similarly, shop assistants can search stock levels at the POS and arrange delivery or store transfer. In turn, this will open up other possibilities.

Next steps-

Contact Retail Express to discover how you can streamline your business, maximise profits and outshine your competitors. With our advanced yet affordable point of sale software, you can:

  • Improve in-store operations and efficiencies by automating tasks and giving staff more access to vital information at the POS
  • Improve your inventory control through better reporting, stock allocation and automated replenishment
  • Sell more by displaying live stock levels in-store, allowing for profitable services such as Click & Collect 
  • Improve your customer experience and build better branding with personalised marketing campaigns
  • Create surveys and questionnaires for your customers to find out what they want
  • Access buyer behaviour reports, seeing where and when customers spend their money
  • Create promotions offering enticing product bundles for more sales without hurting your profit margin

Get a free demo today with an Australian-based retail expert.

Australian and New Zealander inflation & retailer FAQS-

What is the inflation rate in Australia?

As of July 2022, the CPI increased to 6.9% in the March quarter. This was due to higher dwelling construction costs and our car fuel prices.

 What is the inflation rate in New Zealand?

As of July 2022, the annual CPI inflation increased to 5.1% in the March quarter. This has been the largest CPI increase since June 1990, according to Stats NZ.

How does US inflation affect Australia?

Inflation rates in the US in the last 12 months soared to 6.8% last November. This rate is the biggest inflation jump in the US since 1982. Contributing factors include the pandemic, strong consumer demand after Covid, which increased applied to gain complications and massive labour shortages across various businesses and industries. As Australia’s global connection to the US is strong, the flow-on effect is quite significant.

Australian banks still access most of their funds from international markets, which will consequently be affected. If our banks have to pay more money to borrow, it will soon cost us more when they lend money.

Additionally, we Aussies (and Kiwis) buy many goods from America. Take the iPhone, Australia’s number one smartphone, for example. Apple is not known for absorbing costs without passing them on to the consumer, which means higher prices for Aussies and Kiwis.

Further, rising interest rates in the US may likely push the value of the US dollar. This means that buying US goods will cost you more money as your dollar won’t go as farther as it did.

What causes inflation in Australia?

Inflation in Australia is caused by strong economic growth. The price of goods and services increases and there is a fall in the purchasing value of money. When the demand is high, supply needs to meet this demand. For more information about this topic, see “What is inflation?” in our article above.

Is retail spending in Australia going up or down right now?

Despite talk of recession and interest rate hikes, as of June 20, 2022, the quarterly Deloitte Access Economics Retail Forecasts found the contrary. Based on trend analysis, Deloitte noted that “real retail spending during the quarter to March 31 ran 6.2% ahead of what might have been expected had Covid 19 not disrupted markets from early 2020”, according to Inside Retailer. Unfortunately, though, Deloitte expects overall spending will slow from the second half of this year (2022). This slowing is due to challenges as consumers shift towards value purchases and retailers face minimised margins and rising business costs.

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